Chasing Google

Microsoft said on Sunday that it was talking with Yahoo about an alternative transaction that did not involve a full buyout after withdrawing its sweetened $47.5 billion bid for the company on May 3.

Yahoo is a distant second to Google Inc in Web search in the United States, and Microsoft is third.

Combined, Yahoo and Microsoft would have around a 30 percent U.S. share, compared with Google's roughly 60 percent, according to figures from research firm comScore. Google's lead is even larger on a global basis, according to comScore.

The proposal from Microsoft would likely complicate ongoing discussions between Yahoo and Google. The two companies are still talking about a possible search advertising partnership, people familiar with those discussions have told Reuters.

Talks between Yahoo and Microsoft resumed after Microsoft insisted for two weeks that it had moved on from its pursuit of Yahoo, prompting shareholders of the Web company to criticize its board for mishandling negotiations.

Financier Carl Icahn launched a proxy fight last week to force Yahoo to reopen talks with Microsoft. Icahn, who owns nearly 10 million Yahoo shares as well as options to acquire another 49 million shares, formally filed on Monday the preliminary proxy to nominate 10 directors to Yahoo's board.

A person familiar with Icahn's thinking said on Sunday that an alternative deal for Yahoo, rather than a full acquisition, would prompt the investor to push Yahoo to do a deal with Google. Icahn did not comment on the talks between Microsoft and Yahoo in his filing on Monday.

For its part, Alibaba Group, the private holding company whose assets include Alibaba.com, has been lining up investors to help it buy back the Yahoo stake, sources told Reuters earlier.

Yahoo's core franchise stems from the roughly 500 million Web users who pass through its network of Internet media properties each month. Major attractions include Yahoo Mail, news, sports, entertainment and its Flickr.com photo site.

It generates most of its revenue through sales of display advertising to those visitors, as well as making an increasing push to sell ads on non-Yahoo sites. As the No. 2 provider of Web search services, Yahoo also sells ads alongside search results and on a variety of affiliated sites.